This photo taken on November 7, 2018 shows Indian children watching firecrackers during the Diwali Festival celebrations in Ajmer, in western Rajasthan state. - Diwali, the Festival of Lights, marks victory over evil and commemorates the time when Hindu god Lord Rama achieved victory over Ravana and returned to his kingdom Ayodhya. (Photo by Shaukat Ahmed / AFP)
This photo taken on November 7, 2018 shows Indian children watching firecrackers during the Diwali Festival celebrations in Ajmer, in western Rajasthan state. - Diwali, the Festival of Lights, marks victory over evil and commemorates the time when Hindu god Lord Rama achieved victory over Ravana and returned to his kingdom Ayodhya. (Photo by Shaukat Ahmed / AFP)

The Indian corporate sector, which gradually returned to normalcy from the second quarter of the current fiscal, is likely to sustain improvement in the third quarter, aided by strong festive demand, says a report.

During the second quarter, sequential recovery from Q1 FY21 levels was visible across sectors as the lockdown restrictions eased. Some sectors were even able to bounce back to pre-COVID levels and post revenue growth on an annual basis, Icra Ratings said in the report.

"On the demand side, we expect that India Inc would gradually revert to normalcy and would be able to sustain improvements in Q3 FY2021, given the seasonally strong festive season," the rating agency's Vice President (corporate sector ratings) Shamsher Dewan said.

Rural demand continues to be on a positive trend, supported by the normal monsoon, healthy crop outputs, and government support in the form of increased MNREGA allocations, MSME guarantee loans, among others, he said.

The recovery is expected to continue to be rural-led, while urban India would gradually catch up.

"Nevertheless, the sustainability of the recovery, post the ongoing festive season, would remain critical in determining the overall macroeconomic recovery trajectory," Dewan said.

However, he added that the occurrence of a second or third wave of pandemic can reverse the recovery in the absence of a vaccine so far.

Icra said its analysis of financial results of 587 companies in the Indian corporate sector (excluding financial sector entities) showed aggregate revenue growing by 34.9 per cent in Q2 from Q1 levels, although it remained lower by 6.5 per cent on a year-on-year basis.

The margins too have registered an improvement during the second quarter.

"Among consumer-oriented sectors, although large-ticket discretionary purchases like leisure travel and lifestyle retail continue to remain on the back-burner due to risk aversion and general uncertainty, the demand in several other sectors, including passenger vehicles, two-wheelers, consumer durables etc have bounced back over the past few months," Dewan said.

Essential goods like FMCG and consumer foods were not impacted materially even in the midst of the lockdown and continue to remain so.

Commodity-oriented sectors such as cement, iron and steel and metals and mining sector also reported sequential and y-o-y recovery, supported by firming up of commodity prices as well as volume expansion; and aided by a pick-up in industrial activity, the report said.

Industrial and infrastructure-oriented sectors, on the other hand, while exhibiting sequential recovery, are yet to reach their year-ago levels, and contracted by 11 per cent and 14 per cent on an annual basis respectively during the second quarter.

It further said some sectors like aviation and hotels continue to face challenges, which are expected to persist over a prolonged period.

The hotel sector continues to grapple with historically-low occupancy levels, despite some quarantine-related and healthcare staff traffic diverted to hotels.

"Accordingly, recovery in these sectors is likely to be a longer-term phenomenon, given the discretionary nature of spend, and customer wariness that is likely to continue till a vaccine is made available commercially," the agency said.

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